Copart Inc (CPRT) 2003 Q1 法說會逐字稿

Good morning. This is Jay Adair, President of Copart. Before we start, I'd like to turn it over to Wayne Hilty, C.F.O., for Copart, he’ll give you a couple comments and then we'll get the show on the road.

Thanks, Jay During this conference call, we will be making forward-looking statements within the meaning of section 27A of the Securities Act of 1933, and section 21E. of the Securities and Exchange Act of 1934. I would direct you to review the management's discussion and analysis and the factors affecting future results which are contained in the company's 10-K and other SEC filings for a full discussion of the factors that could affect future performance.

Our agenda this morning has three items. First off, Jay Adair, our President, will go over highlights of the quarter and recap some important accomplishments. Second, I will discuss with you financial details of the quarter and finally we'll open up to your questions. Now it’s my privilege to turn you over to Jay Adair.

Thank you Wayne. Good morning. We had a terrific quarter with $83.5m in revenues generating $23.6m in operating income. That's a 28% operating margin, and net income of $14.7m, and that translated to 16 cents per share. For the same quarter a year ago, those numbers were $72.2m in revenue and 15 cents a share. Gross proceeds for the quarter were $314m and we finished the quarter with 99 locations.

I'm going to discuss our results for virtual bidding and Internet bidding, and then I'll go over into some of the acquisitions and start-ups we made for the quarter, and then Wayne will discuss some of the other financials and we'll open it up for Q and A. We finished the quarter with 37% of gross proceeds being affected by Internet. 16% of that number was through virtual bidding, and obviously 21% was through proxy bidding. We currently have 59 locations now on virtual bidding. I anticipate that in the next three to six months, we will have all but a handful of facilities converted. The facilities that will be lastly converted will be the larger facilities due to the split lane and the fact we have two lanes at those facilities, and then a few where we've got to put some buildings up, finish some buildings to have room for the buyers to attend the auction and sit indoors. Let's see.

In addition, we did $60m, if you take Internet and virtual, if you add those two numbers together, we did $60m sold, that's 19% of total Internet, and that's not counting push, that's just the sold side, and that came out at 64% of all products sold over the Internet being out of state. So that's some very, very powerful numbers. Also virtual yards are up 7% compared to the same stores that were not virtual a year ago. So we're seeing very, very significant increases in return due to virtual bidding. We're excited about this obviously because we're in a market today that's relatively flat. Our non-virtual yards are relatively flat compared to a year ago. We're up one to two points in those non-virtual yards compared to a year ago whereas the virtual yards are up 7%, so we're seeing tremendous improvement in virtual bidding. Obviously I think the main reason for that is that a lot of buyers were bidding via proxy. They can now come in if their proxy bid is exceeded and they can come in real-time and start to trump those bids that are coming in from other virtual bidders and from live bidders, so it's been a very, very successful product, and I think it will be, as I said, 16% of the units being virtual, 21% being proxy, I think it's going to exceed proxy within two quarters for units actually affected on Internet.

I'll go over some acquisitions for the quarter. We announced the acquisition of Pittsburgh, Motors Auction Group facility, and Richmond, Virginia, another Motors Auction Group facility, and I think in the last quarter, I talked about our Reno, Nevada location which was done in September. That was done in this quarter. Also, we opened up a Greenfield in Springfield, Missouri, and most recently, we announced our Corpus Christi location. So that adds another five locations for the quarter, and as I said earlier, brings us to 99 locations. With that, I will turn it over to Wayne Hilty and he'll give you a review of financials and then we will open up for Q and A.

Thanks, Jay. As Jay discussed, financial performance was in line with our expectations. For the first quarter ending October 31, net income grew to $14.7m. Compared to the first quarter of last year, total revenues increased by 16% to $83.5m. The $11.2m growth in revenue came from both new and same stores. We'll talk a little bit more about that in just a moment.

The mix of units, there was a steady level in the percentage incentive program, which we call the PIP program. For the quarter, 67% of volume was processed under PIP agreements compared to 67% a year ago. Now we'll move on our discussion to expenses and other income.

Yard and fleet expenses increased by $4.3m, or about 10% this quarter compared to a year ago. New stores accounted for $2.3m of this expense. The remainder of the increase, about $2m, is due to the cost of handling increased volume at existing stores. As Jay pointed out, same-store revenues increased by 12% and same-store expenses increased by 5% this quarter.

General and administrative expenses increased by approximately $1.5m over last year, due to the cost of handling increased volume and cost of exploring new business opportunities. For the quarter, G and A was 8% of revenues compared to 7% of revenues one year ago. The operating profit was $23.7m, compared to $20.5 one year ago. Our operating profit percentage is steady at 28.4% for the current quarter and 28.3% one year ago. Net other income decreased by approximately $13,000 compared to last year due principally to less gain on retirement of fixed assets, offset by increase in interest income.

The tax rate we used in both periods was 39.5%, and we expect that to be consistent for the remainder of the year. Compared to the same period in the prior year, the net income for the first quarter increased to $14.7m and diluted earnings per share increased to 16 cents based on 94,056,000 weighted average shares.

Now let's take a look at new store information. The 10 new facilities added approximately $2.8m of new revenue, and as I noted earlier, their direct costs were $2.3m. Depreciation and amortization is an additional $359,000. So the effect of new acquisitions and opening on the current quarter is an operating profit of approximately $100,000 please keep in mind that these new facilities are our investment in the future. The first 12 to 18 months at some facilities will show losses.

Finally let's look at the balance sheet and cash flow. We started the fiscal year in August with cash and cash equivalents of $133m. As of October 31, that balance is $126m. A decrease of $7m from the start of the fiscal year. Operating cash flow this quarter was $20.1m, from a net income of $14.7. A significant portion of this quarter's operating cash flow, over $6m, has gone into accounts receivable, prepaid expenses and other working capital items for the inventory build that occurs normally this time of the year. Capital spending for the quarter was $27m. The $27m includes the cost of acquisition and start-up facility recently announced, plus significant investments in land, facilities, computer systems and software. We continue to expand our capacity to handle anticipated growth. That concludes the prepared portion of the call. [Shamara] If you could rejoin us and explain how Q and A would work, we'd appreciate it.

Thank you gentleman. Ladies and gentlemen, at this time, we will conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys. Our first question comes from Scott Stembo (ph.) with Sadadi & Company (ph.). Please state your question.

Good morning, gentlemen.

Good morning, Scott.

Good morning, Scott.

Jay, maybe you could just touch on how the outlook looks maybe as far as the weather patterns and maybe as far as what the inventory looks like coming in. Obviously you've pretty much kept to what you guided on the last quarter, but has anything changed materially since then?

I'm going to tell you that nothing's really changed materially at this point. We're going to -- as you can see from the projections that we put out there, there's no real change in the 10 to 15% guidance. With that said, we're obviously having some decent weather right now, so I'm excited about that, it's nice to see that we are getting some weather across the country, and inventories are up a little bit.

Okay. And as far as Motors Auction Group, at some point, will you be giving some metrics on how the business is doing as far as revenues and operating profits?

Right, we will. It's, right now, what, about 4% of revenues, total revenues?

Yeah.

It's about 4% of revenues for the company, so we're going to wait till it gets a little bigger, Scott, when it's a more material part of the business, then we'll start breaking it out.

And the sites are running profitably right now?

Yes, definitely.

That's all I have for now. Thanks.

Thank you.

Our next question comes from Emeret Paraway with S& P.. Please state your question.

Hi. I'm Rick Tavari from S & P. High, guys, how are you doing?

Good. How are you?

Just want to follow up with the weather-related question. There's been a lot of wet weather here except for the West Coast, it's been pretty much nationwide, a lot of weather wet weather. Have you seen that impact your business at all?

Yeah, it has. As I said to Scott just on the last call that inventories are up a little bit, and we've had some weather in California. It was just for about four or five days and now it's been dry and foggy, but yeah, inventories are up a bit, and we are seeing some volumes increasing, so as we sit right now, the weather is looking good. And we'll see how the year looks. We've still got, you know, another quarter. By the end of next quarter, I'll know where inventories are at, and I'll be in a much better position to let everyone know where we think we're going to end up.

Okay that's all for now. Thank you.

Okay. Thanks.

Thank you.

Our next question comes from Dan Retter from Laird Norton Trust Company. Sir, please state your question.

Hello, gentlemen.

Hi, Dan.

Good morning.

You mentioned S, G and A. Can you talk a little bit more specific about where that go as a percentage of revenues over the next couple of quarters and can you elaborate on some of the opportunities that you're looking into?

With respect to G and A?

Yeah.

I would say that G and A is probably going to track relatively close to revenues right now. We're investing --

Stay about 8% then?

Pardon me?

Stay about 8%?

[Inaudible ] [7 to 8].

We are continuing right now to invest in finishing up our virtual bidding. We've got some -- I say finishing it up. We've got some additional changes we're going to make to make the product even better and as I said, it's a tremendously successful product right now. I mean, we're seeing an increase right now of about $70 a car across the board. Some yards are seeing as much as $200 a car increase, so when you've got that kind of improvement, you know, that kind of a product like that, I think it's going to generate a lot of volume for us going forward in the next 12 to 18 months in additional business. It kind of speaks for itself, you know, it's doing tremendously well. I mean, we're seeing these large increases in vehicles being sold over the product, and we're seeing a large increase in gross proceeds, and then the other side of the G and A would be MAG. We're continuing to invest in the Motors Auction Group technology in the IT side, and that's just going to continue to happen. That's going to continue to take place.

Now, you mentioned $70 per car or something. Wasn't that about $34 per car a coupe of quarters ago or last quarter?

It could have been. I don't remember the numbers, to be honest with you, Dan. , a couple quarters ago. It could have been at $34 a car in fact it had to be at some point, because it started off at zero, and as we launched the product its gotten better and better, so here we are today at $70 a car, and as I said, in some stores, considerably north of that. So it's a terrific product. I mean, you're not going to see -- I mean, who would have thought, it took us from 1998 to 2002 to get to 21%, and here we are launching the product in January, we're talking about the month of November, and we finished October with 16%. So you're looking at literally in one year, it's going to catch proxy bidding, and it took proxy bidding to get four years where it's at. So that's why we're very excited about it. Obviously the buyers are embracing the product just based on its growth.

Okay, great. Thanks very much.

You're welcome.

Our next question comes from Alan [inaudible] with Kopler Beach Capital (ph.). Sir, Please state your question.

Thank you. Can you talk about the competitive landscape at all? Last conference call, you cited weather as well as competition as being a factor. Can you talk a bit about the competition now? What are you seeing out there and are you seeing smaller -- not just from your bigger competitors but some of your smaller yards as well?

Sure. Is there something specific that you want to know about competition?

No, just wanted to see in terms of the reason whether pricing is more aggressive or less aggressive given, I guess, the slowdown in volumes that everybody's seen due to the weather, whether there are certain regions that are faster-growing than others. Just in general, picture.

I would say that I feel better with respect to the competitive landscape this quarter than I did last quarter. That's simply from the standpoint that virtual bidding is becoming such a powerful product that we have been showing it to a lot of customers, and the results are in. The facts speak for themselves. We print out a detail list and we'll show them 100,000 cars we sold a year ago and 100,000 cars we sold this year, and we'll give it to them by car in detail and they can analyze it for themselves. When they see the data, they know that the returns are up, and that is a big push. You know, you've got to give them a reason to switch, and pricing and returns are both big reasons, and then, you know, work flow, and, of course, we've always claimed that we have the best systems for reducing work flow and reporting capabilities, and, you know, we've always claimed that the competitive landscape out there is such that we're typically, you know, seeing competition that comes in cheaper, or less -- you know, less of a price up front for the services. At the end of the day, because of virtual bidding and the other things that we do, we've turned the marketplace into a global marketplace, not just a local marketplace, and literally, over 10% in gross proceeds are now selling out of the country, out of U.S. We're seeing over 10% of the dollars that we sell going outside the United States, and that's truly becoming a global marketplace versus a local marketplace, and I think that is really giving insurance companies a reason to use Copart more than ever, and I haven't seen pricing go lower than where they were last quarter, where our competition, when you look at the competitive landscape from a quarter ago, it hasn't gotten more competitive with respect to pricing, yet I feel that our products are stronger and are making a larger impact with our customer, and that's going to translate to more volume coming our way, I believe, in the coming quarters. So I think we're in a better position today than we were a quarter ago.

Okay. I'm surprised by that number, 10% outside the U.S. How do they ship the cars from here-- outside of the U.S.?

Oh, container. There's a guy in L.A. that ships about 85 cars a week, or at one time he did, I don't know if he still does, but I ran into him one day with the CEO by accident, and they load -- I think it was five cars into a container, they take the wheels off and block them up and slide them in and out they go. And then, of course, a lot of product is sold to Mexico, Guatemala, Central America, South America and Canada, so it's not all being shipped, per se. A lot of it is being trucked.

What about steel prices or scrap prices, has that impacted your business recently? What are you seeing in that respect?

There's really no change there. There's really no change. The junk is still worth what it's worth. It's still low-end prices, bought by junk buyers.

Your business is very undercapitalized for the situation that you're in. I don't really see much of a need for you to have a $1.30 plus in cash with no debt especially when you own most of your facilities and probably can get mortgages on them and since you seem to be generating a lot of cash and seem to be doing well. Can you talk about the philosophy behind a stock buyback or philosophy behind maybe leveraging the balance sheet a little bit?

Sure. We're opposed to leverage, as most of the listeners here probably know from being around our culture now, I guess we've been a public company for, what, eight years, close to nine years. So we've been against leverage for basically my history, the time that I've been with the company, which is 13 years. I've seen the CEO just doesn't like to get into a leverage situation. With respect to cash on the balance sheet, it focuses on opportunity, and there's an opportunity cost to having that cash on the balance sheet, and there's a lost opportunity if you don't have that cash on the balance sheet, and that is something we look at every month, not just quarterly but every month. We look at where our stock prices are at, we look at the cash on the balance sheet and we look at the opportunities we think are out there in the marketplace, and if something came along, an acquisition that required a large amount of cash, we want to be able to make that acquisition. We're a growth company, and we're going to focus on that first. With that said, if the stock price got to a position that it compelled us to make that decision, we would also look at that, and if we felt that a buyback made sense, we're not opposed to it, and if it made sense to us, we would do it.

Okay. I appreciate that. I would also encourage you, I know you're looking at [inaudible], I'd encourage you to focus on return from equity from a shareholder perspective and understand that cash on the books earning less than 2% in this kind of environment doesn't sort of burns a hole in your pocket, especially where your stock is where it is.

Well, I'm not the smartest kid in the world but I can do that kind of math. We have done that, we've looked at it, and it's not just like we're ignoring it. We're well aware of return on equity and what cash at 1.5% is doing to the balance sheet. It also goes back to opportunity, so --

It's a rich man's problem for to you have.

You know, it's a good problem, so at the end of the day, I'd rather have the cash than not.

Exactly. Thank you very much.

Okay.

Gentlemen, there are no further questions at this time. However, if you wish, I can repeat instructions on how to ask a question.

No, I think that's okay. I think they know how to do it. I'll just finish up by thanking everyone for coming to the conference call. We did have a terrific quarter, I think. The fundamentals of the business are very, very strong. I'm more excited than I've ever been with our Internet products. I think that virtual bidding is basically blowing away the proxy bidding product, even though it's maintaining its penetration in the marketplace, the growth that we're seeing in virtual bidding, I really believe will have proxy bidding lapped or beat, rather, within another one to two quarters. So we're very excited about where we're at and where we're going, and with that, I will close the call out. So thank you very much for attending, and we'll see you next quarter.

Thank you, gentlemen.